Public Bill Committee

[Mr David Amess in the Chair]

Q 213213

David Amess: Good afternoon everyone. I welcome our witness, Mr Hooper, to the Committee. We are greatly looking forward to asking you questions and getting your evidence on record, which will help the Committee with its deliberations when we discuss the Bill in detail next week. Will you introduce yourself and make some opening remarks on how you feel about the legislation?

Richard Hooper:  Thank you and good morning, Chairman. I believe I am the warm-up act for your final session, when the Ministers, Vaizey and Davey, will be interrogated. It was very kind of Opposition Front Benchers, during Second Reading, to give me a peerage and for the Government Front Benchers to counter with a knighthood, but the Chairman has my title right.
On a serious note, given that this is 11 November and I am in front of a House of Commons Committee, I would like to pay tribute to my father, Edwin Morris Hooper, who was killed on active service returning from a bombing raid on 16 February 1942 while serving as a navigator in Bomber Command. By all accounts, he was a great man.
I would also like to pay tribute to my team. In 2008, when I was doing the work for John Hutton and then Peter Mandelson, I had a panel made up of Ian Smith and Dame Deirdre Hutton. They played a major role in this. It was a team effort. Civil servants often get a bad press, but I have had three years of considerable support, courtesy and hard work from the civil servants in the Department of business, ShEx—the Shareholder Executive—the Treasury and No. 10. Some of them are behind me today, and I want to pay tribute to them.
There are three reports. The first was in May 2008, and it was a diagnostic report. Interestingly, that was apparently a thought from the then Prime Minister, Gordon Brown, who said, “Why don’t you split the reports into diagnostic and solutions, because then you may actually get agreement on the diagnosis.” If you put a diagnosis and the solutions in the same report, everybody jumps to the solutions and disagrees with them, so in May 2008 we had a diagnosis and everybody agreed with it. The CWU came to my publication of the report, and went straight to Millbank and promoted the report and the diagnosis. So we have got considerable buy-in on the diagnosis.
The report itself was 16 December 2008. As you know, it was fully supported by the then Labour Government in both the House of Lords and the House of Commons. It went through the House of Lords and, just as it was poised for the House of Commons, Lord Mandelson stood up in the House of Lords and said that, due to market conditions, the Bill was being shelved. I was gently kicked into the long grass, where I was until just after the appearance of a coalition Government and a call from Mr Davey’s office to come and talk about the possibility of doing an update report, which I did for Vince Cable and for Mr Davey. It was published early in September.

Q 214

Graeme Morrice: May I ask a simple question? Do you believe that full wholesale privatisation of Royal Mail is the solution to what is perceived as being the problem?

Richard Hooper:  I have been careful to keep away from the issue of minority and majority shareholdings. In the original 2008 report, I talked about strategic partnership. Indeed, it was the Government of the day who decided that that should be a minority shareholding and that public ownership should, therefore, be in the majority. The coalition Government’s view is different. They are looking at a much larger shareholding—it could be 100% minus the 10% for the employee share trust. I genuinely think that that is more a political matter. As chairman of an independent review, I try to keep to what I think is the important point. The important point I want to make is that private sector capital is needed in this business—it is needed urgently, it was needed two years ago and it is needed now. Whether it is a minority or majority shareholding, I would prefer to leave that to the political process.

Q 215

Graeme Morrice: Just as a supplementary, are you suggesting that an injection of private capital could still be successful under a public ownership model?

Richard Hooper:  No. All I am saying is that I believe private sector capital is required for the reasons that I have set out. That needs to happen urgently. Another issue is when the Government, as shareholder, come to sell Royal Mail, they need some flexibility. When you are selling shares in a company—whether it is a trade buyer, a private equity buyer or an IPO—the sellers need to have flexibility on what amount of shares to sell. That could, indeed, be packaged over two or three years.

Q 216

Andrew Stephenson: I want to pick up something that was said by some of the Communication Workers Union representatives whom we were speaking to on Tuesday. They seemed to be of the opinion that they could almost pick and choose some of the measures suggested in your report. That suggests that if we address the problems with regulation and look at pensions—if the Government were to sort out pensions separately—that would be sufficient. Can you elaborate on why you think or do not think that the measures in your report should be treated as a package and should be implemented in full?

Richard Hooper:  That is an absolutely crucial question. The reports in 2008 and in September 2010 were quite clear that the three big hitting recommendations—parts 1, 2 and 3 of the Bill—were locked together. You cannot go à la carte; this is a three-course meal and you have to consume it as such. The unions and I have had many discussions, and we agree on a very large number of things. The one thing that we have never agreed on is private sector capital, but there is no disagreement on part 2 and part 3 of the Bill—deregulation, moving to Ofcom and the pension deficit.
In my view, the unions’ feeling was that you could do two or three and not one. My main argument against that is as follows: I think it is unreasonable for the taxpayer to take on the pension deficit, which the taxpayer—the public purse—is going to do, without a cast iron guarantee that the modernisation of the Royal Mail will continue to accelerate. Modernisation of the Royal Mail was at the heart of the 2008 report and is at the heart of the 2010 report. The issues that private sector capital will allow are, for example, that you will be able to insulate the management more effectively from political intervention in commercial decisions. One of the issues that we face is a significant reduction in the number of sorting centres. In 2008 there were 69 sorting centres; there are now 64. Seventeen sorting centres are out for consultation, and I guess that we will end up with something like 35 sorting centres from those 69. Obviously, there is ample opportunity for people to try to intervene in those decisions. I think that private sector capital helps to insulate the commercial management of the enterprise from overmuch political intervention.

Q 217

Andrew Stephenson: Do you see a share sale as the best way to get private capital into the Royal Mail?

Richard Hooper:  There are various ways of getting private sector capital. One is a trade buyer and another is a private equity player. For example, I have visited Denmark, where CVC Capital Partners, a private equity player, has played a major role in Post Danmark. It then moved its interest to Belgium, where it also did an extremely strong job. There could, of course, be an initial public offering.

Q 218

Gordon Banks: In your latest report, you talk about improved industrial relations since your first report in 2008. Could you tell us why and how you think there has been such an improvement?

Richard Hooper:  I suppose one of the frustrations two years ago was that my team and I felt that there were a whole lot of issues that, for whatever reason, the management and the unions would not sit around a table and discuss. So when Billy Hayes and Dave Ward came to see us, they would say things like, “We never get to see the big picture from management. What is the five-year vision of this company? How many sorting centres? How many delivery offices? How many job losses? All we get is salami-slicing cuts to opex, or operating expenditure.” The management said to us, “The moment we sit down with the unions, strikes are threatened if we mention cost reduction.”
In the original report—for goodness’ sake—a very strong case was made to the management and the unions. We did not take sides on the matter; we just asked them to get around a table. That has actually happened, and what is so impressive about the March 2010 modernisation agreement is that it is a very long and very detailed document. In the preparation, which took three or four months, there was a clear statement by the management and a clear discussion with the management on the big picture—what is happening to the future of the business across the main dimensions. For that reason, I think that there has been a significant improvement.

Q 219

Gordon Banks: So top management and the unions started to speak and engage in a much more grown-up way. I take it that that is a synopsis of what you have said. Do you see privatisation creating any particular challenges to good industrial relations in a privatised Royal Mail?

Richard Hooper:  Incidentally, I also pay tribute to the role of ACAS in the discussions that led to the March 2010 agreement. ACAS played a major role, and we should thank it for that.
They are looking at things on a much more sensible basis. The real issues have been discussed, but, from experience, there was a pay agreement in 2007 that came unstuck by 2009, which led to industrial action. So we have to be eternally vigilant, and the unions and management have to be eternally vigilant, but I believe that there is great willingness.
The important thing is that the unions, particularly Billy Hayes and Dave Ward of the CWU, said to us from the beginning that they accept that modernisation of the Royal Mail will involve job losses. They were not sticking their heads in the sand and saying, “You can have modernisation, but, by the way, don’t reduce the number of jobs.” They were quite clear about that. They, for example, criticised the management for never talking about anything other than cost reduction. When one looks at modernisation—you will see this in my report—it has a number of dimensions, one of which I call diversification, which is the ability to move Royal Mail into new revenue streams.
While I was writing the report for the coalition Government, through my letter box one day came a document from Radio Taxis, with which I have an account. It said, “Please would you mind being environmental and green and stop having things posted through the letterbox to you, and would you come to an electronic solution and do it over the computer?” That service will be provided by Swiss Post. I was really upset at that moment. This is a classic example. I live in London, I have an account with Radio Taxis and the organisation that will do the electronic erosion of the letters business is not Royal Mail, but Swiss Post. That is in London, in the United Kingdom.
Diversification is part of this story—finding new revenue streams. The Royal Mail still has not had the time or the facility to move in that direction, but it is an important part of the modernisation story.

Q 220

Gordon Banks: Do you see any problems that privatisation could deliver in industrial relations, and therefore in continued modernisation?

Richard Hooper:  I think that the closure of sorting offices will have some difficult moments, because towns and cities will lose sorting centres. Local politicians may have views on that. There are therefore opportunities for political intervention into commercial decisions, as I have mentioned. The fact that the union is not happy with private sector capital and has always argued very strongly against it is a factor. I am encouraged because the relationships are far better and there is a great acknowledgment that everybody has to change.

Q 221

Damian Collins: In your report, you talk about the “technology wedge” and the gap between GDP growth and the decline in postal services. Will you say a little more about that? Concerns were raised in Tuesday’s sittings about the problem you have just identified of people using online services. The relative cost of using post means that there might be a dramatic fall-off in business use of the postal market. Your report suggests a 25% to 40% decline over the next five years. Do you think that even that estimate might be conservative depending on the way in which markets develop?

Richard Hooper:  Just as modernisation is the critical issue that this legislation is aimed at, so the critical external factor is what you have just described. This is not something that just the Royal Mail is experiencing; this is happening to every traditional media industry.
Look at the Johnston Press results in the Financial Times this morning. I am on the board of Yell Group plc—the “Yellow Pages”—which has businesses in America, Latin America, Spain and here. We are all facing the same issue: structural decline is happening alongside cyclical issues. We are trying to distinguish what is cyclical and what is structural, so that we know how much will come back when the recession finally lifts and when small and medium-sized businesses feel more comfortable and feel that they have money back in their pockets.
In the case of Royal Mail, I stated a sort of law in the report that said, “If it is digitisable, sooner or later, it will be digitised.” That has implications for the management of Royal Mail and of postal operators around the world. The United States Postal Service lost 12.2% of letter volume last year. The Royal Mail figure was a mere 7%. There is fundamental structural decline in the letters business.
There are some good bits. For example, people like to read printed magazines, so there is still a strong magazine publishing and distribution opportunity. Also, people still like to read catalogues in print. One should not write off the letters business, but one should acknowledge that if it is digitisable, there is a danger that sooner or later it will be digitised.
There is also a demographic issue. I am of a generation that still puts letters in red pillar boxes. A 30-year-old young woman who talked to us two years ago asked, “Why would I ever need to know somebody’s physical address, unless there was a party?” She said, “Here is my laptop, which has all my e-mail addresses. Here is my mobile phone, which has all my numbers and, by the way, I don’t answer phones unless I know who it is. So why would I need a physical address?” There is that huge demographic issue.
That is the bad news, but let us not forget the jolly good news, which involves the very technology that is swiftly eroding the digitisable letters business, and doing something else: e-commerce. If I order the water bottle that I am holding in my hand—“Beam me up, Scotty”—it will not yet work. When it does work, we will have a problem.
However, during the lifetime of members of the Committee, we will be all right. Physical non-digitisable products are a huge growth market, and one of the reasons why I am optimistic about the Royal Mail is that there is a huge opportunity for it to be a major player. Indeed, Parcelforce and Royal Mail letters are a major player in books and nappies. Amazon has just bought a nappy company.

Q 222

Damian Collins: I have one further question. I am sure that when post offices have closed, colleagues will have had experience of the important role they played in supporting the parcel function of small businesses that buy and sell goods online. At what point do you think that the growth in online retail, and parcels being delivered to support that process, will start to make a significant impact on the business, and address some of the long-term decline issues that the bigger businesses are dealing with?

Richard Hooper:  It is very interesting. In one of the final drafts of the original report, one sentence said that the decline in the digitisable letters business would be made up by the growth and increase in the non-digitisable packets and parcels business. I was slightly worried about that line, so I said it to a rather key person in the world postal industry. I told him that I would just read him a sentence from something that I did not know about. He said, “You can’t say that. There is no evidence that the size of the hole here will be filled up by the packets and parcels market”.
We should not kid ourselves about that. The packets and parcels market is much more competitive. There are huge numbers of players. It overlaps with the courier business.

Q 223

David Wright: Can I draw you back to your comments on the modernisation programme? Clearly, you had another bite at the cherry. Basically, you reviewed your report for the coalition Government and it was published recently. You said that the process had got worse, that modernisation had got to be accelerated and that problems had intensified at the Royal Mail. Is that right?

Richard Hooper:  No, no.

Q 224

David Wright: Let me wind you back.

Richard Hooper:  No, I did not say that. I actually said that there has been some really good progress on modernisation—a very important distinction.

Q 225

David Wright: So we have to continue to press on modernisation. The reason why I asked that question is that Moya Greene basically said that there had been a two-year process when modernisation had gathered pace. You have clearly talked this afternoon about agreements between the unions and the management moving that forward. I am driving at when you think will be the best point at which the business should go to market and draw in private investment. Should we be doing it as quickly as possible? Should we be concluding particular elements of the modernisation process? How does it fit together?

Richard Hooper:  This response will be slightly like my response to your colleague. I am slightly nervous about getting into that. It is a commercial matter. For those selling the Royal Mail, it will be a partly confidential process. Big trading issues are involved. For me to have a view about when you would float the company would not be sensible.
However, the key point is that modernisation is happening. The management said clearly to me—and I have put it in the update report—that we are roughly 50% of the way there, and we have another 50% to go. I do not think it is necessary to wait until you have reached the top of the premier league, but you certainly want to be well away from and out of the relegation zone. I think that the company is making that progress.

Q 226

Priti Patel: Mr Hooper, to what extent do you feel that the Bill addresses many of the points you have raised in your successive reviews? Do you have any particular concerns about the proposed regulatory framework from Postcomm to Ofcom? Do you think that will satisfactorily meet the obligations that will be incumbent on them?

Richard Hooper:  Part 3 of the Bill is terribly important. We so often spend our time on the private sector point, because it is probably more politically contentious and we tend to underestimate the regulatory matters. Part 3 of the Bill is extremely important. It has a lot of very good material. I think it will also give Ofcom sensible flexibility.
I do not think that we in this room should try to regulate Royal Mail in a close sense; that is much better left to an independent regulator. You may say that I am biased because I was the founding deputy chairman of Ofcom. I am an acknowledged fan of Ofcom and how it has approached things, so I think it will do an extremely good job.
Clause 37 was discussed on Tuesday and it says that Ofcom “may” impose access regulation. That is a very interesting use of the word “may”. Moya Greene has a strong view about ex ante access regulation, and I think it is important that Ofcom has that flexibility. Indeed, clause 6 of the Communications Act 2003 gives Ofcom deregulatory powers, so it gives it the ability to deregulate.
The heart of what I was saying in the report is: decide where the general monopoly, for want of a better word, is. Economists do not usually let me use words such as “monopoly”, but I like to use it. Decide where it is. Effectively, it is in the delivery bit of Royal Mail—99% of letters are delivered by Royal Mail, and up stream is much more competitive. Decide where the monopoly is and in that monopoly you have the universal postal service strongly welded. Make sure that that is very clearly and well regulated, then reduce regulation outside the monopoly where competition is beginning to bite. That is the philosophy in the report and I think that that philosophy is in part 3 of the Bill, too.
When you look at part 3 line by line, you might make sure that Ofcom and Postcomm are content that there are sufficient powers to prevent cherry-picking. Cherry-picking is a big issue and one that we have discussed at length. It basically means that somebody comes in and starts delivering two days a week to Liverpool, Birmingham, Manchester, Edinburgh, Glasgow and Cardiff, and then expects the rest of his or her mail to be delivered by Royal Mail to all the nasty places that cost lots more money.
So there is a basic cross-subsidisation issue, because my first-class mail from north London to Kensington is subsidising that to the Orkneys. Do make sure that Ofcom and Postcomm, which is giving over the role, are content that they have the powers to stop cherry-picking, because it would be very damaging to the universal postal service.

Q 227

Nia Griffith: Can we go back to the business of modernisation? Do you agree that it has been relatively successful, as Moya Greene has said? It has taken place under public ownership. She seemed to have a different view from you. Perhaps you are modest about what the British system has achieved compared with those abroad, but she told us that she thought that modernisation was going very well. Is that simply because, over the past two years, it has speeded up so much?
When you talk about a minority stake—leave aside whether you think it is the right or wrong thing to do—is it still a potential option that a stake could be sold to the private sector and that the rest of the money could then be raised by issuing corporate bonds?

Richard Hooper:  I have tried to answer that before. I have really tried to avoid getting into the minority-majority debate; that is a matter for you as elected politicians. I am not sure it is a matter for me as an unelected member of the citizenry. I just want to see private sector capital come into that company.
The recent half-year results of Royal Mail show you that this company’s financial state is significantly worse than when we reported two years ago. There will be a need for money. The advantage of private sector capital is that it is more flexible. It is quicker. One of the problems with capital from the public purse, which Royal Mail has dealt with in the past, is the whole issue around state aid and Brussels. The last time the Government put money into Royal Mail, it took two years for Brussels to agree it. So it is not the most flexible thing.
Coming back to the question about who is the monster in the room, you cannot believe the speed at which the digital media are expanding and changing. If you are not careful, it eats your lunch before you have even noticed that you had lunch sitting in front of you. Speed of capital, flexibility of capital and something very important that the Queen’s Speech mentioned—the private sector disciplines that come with private sector capital: those are the reasons why I am keen on it. I think the minority-majority debate is something that is going on in the House anyway.

Q 228

Nia Griffith: You speak very warmly of post offices in your report. Clearly the idea is that the Post Office would remain in public ownership but Royal Mail might be privatised. How do you see the survival of the post offices if there is no longer an automatic inter-business agreement between the two and is there any way of tying a private company into using the post office network?

Richard Hooper:  That is an extremely important question. It all comes down to the famous inter-business agreement, which is a contract between Royal Mail right now, even though they are in the same company, and Post Office Ltd. The importance of the inter-business agreement should not be underestimated. It generates, as you know, one third of Post Office’s revenue, which is around £350 million a year. The inter-business agreement has to be well thought through, well negotiated and have a sensible time scale. George Thomson talks about a 10-year time scale and others talk about a five-year time scale. There are commercial issues there. It is extremely important because Post Office Ltd clearly has to have certainty for its future and, indeed, Royal Mail for its future. Moya is one of the strongest advocates of reminding us all that the front office for Royal Mail is extremely important. It is extremely important both for putting mail into the system and for retrieving parcels and packets, which is part of this story. There is no doubt that the chief executive of Royal Mail sees that as an extremely important relationship and the inter-business agreement is the key document.

Q 229

Nia Griffith: But how easy will it be to sell Royal Mail, depending on how long you want to make that IBA? You are talking about five or 10 years. If you are a sub-post master with the money invested or you are hoping to realise your assets after you retire, 10 years is not very long. You may not be able to sell later on. If it were longer than that would it still be feasible to sell?

Richard Hooper:  Sorry, but again this is a bit like the minority-majority argument. In the end the IBA will be a very important commercial document. Clearly the Government as shareholder on both sides will have a very strong view on it. It clearly has to be there. It has to be for a proper amount of time. It has to address the right issues. One of the interesting issues is the extent to which there is a symmetric exclusivity in the contract. That is to say, post offices cannot deal with postal competitors to Royal Mail but nor can Royal Mail open postal outlets that are not post offices. That is quite an important issue. There may be competition issues surrounding that notion of exclusivity. All of those will have to be carefully handled.

Q 230

Richard Fuller: Mr Hooper, the Bill contains quite extensive provisions on extending employee ownership with a minimum of 10% of the shares in the Royal Mail and mutualisation of the Post Office. Have you any comments on that approach generally? Also, given your work with the Royal Mail, what do you think that form of participation would do to help to overcome some of the problems that the Royal Mail has had historically?

Richard Hooper:  This comes back to the question about the relationship between the work force and the management. I believe that employee shares that are correctly structured—I shall come back to the “correctly structured” point in a moment—help employee engagement.
I do not know whether the Committee has had a chance to see any of the Royal Mail’s world-class manufacturing sites. If you have time to go to Cardiff, to the Northern Ireland sorting centre or to Gatwick, it is an extraordinary experience. I think you were told about it earlier, but there you have three and now a growing number of sorting centres where employees are expressly asked to suggest ways of improving shop-floor practices. That is not someone from the management saying, “I’m now going to move that glass from here to there.” It is the guy or woman who is doing it saying, “Actually, it’s not in the right place. What if we put it over there?” What you see at Gatwick—I understand that the situation is the same in Cardiff and Northern Ireland—is that costs have gone down, productivity has gone up and, very importantly, accidents have reduced massively.
I was at the National Maritime museum a couple of weeks ago as a guest of Royal Mail when the world-class manufacturing awards were being presented. That was the first time Royal Mail had ever won medals in the world-class manufacturing awards, and those three sorting centres all won bronze medals. The only other manufacturer that was winning awards was Fiat of Italy, which uses very, very advanced manufacturing processes.
So in answer to your question, employee shares help employee engagement. I think they encourage it. I also think that the idea of the trust is very important. This is, again, more of a political decision, but there is a problem with employees just having shares. I know about this because I was at BT in 1984 during privatisation. What happens is that employees punt on shares, and the moment they need a holiday, they sell the share, so some of the incentivisation is lost. The beauty of the John Lewis Trust style is that you do not physically own the share. You cannot sell it; you do not make capital gains at the end of your time. Basically, you are being involved in a profit-share, dividend-share arrangement, which means that when you leave John Lewis—or when you leave Royal Mail if there is this trust—those shares still stay in the body, and I think they are more engaging, but that is a personal view.

Q 231

Richard Fuller: May I ask a supplementary question? There have been representations for other forms of employee participation and specifically for designated worker or trade union representatives on any privatised Royal Mail board. Do you think that that issue should be considered as part of statute in the Bill or is it better left to any prospective owner to work out themselves?

Richard Hooper:  I am not sure that I have a view on that, except to say that in Denmark the unions are represented on Post Danmark’s board. I think that has worked well, but I do not have a view on it; I have not looked at it in any detail. I suspect that the answer to your question is that when you are preparing Royal Mail for privatisation, you need quite a lot of flexibility. I think that if there are too many rules around it, those people who are finding buyers will have more difficulty.

Q 232

Tom Blenkinsop: You talk about the need for a large capital injection into the Royal Mail. Can you estimate the size of the capital injection required?

Richard Hooper:  I cannot, actually. I never have done that. All I can say is that I believe Moya Greene talked about £2 billion to £3 billion when she appeared before you. It is certainly a significant sum.

Q 233

Tom Blenkinsop: Is there not a ballpark figure?

Richard Hooper:  I have never put it in my report, and one of the reasons is that I am not privy to Royal Mail’s confidential five-year plans. I saw one two years ago, but I have not seen one recently. It would be inappropriate, therefore, for me to give you a figure off the top of my head. Looking at the cash outflows of the company, and looking at what has happened recently to operating profit—Royal Mail Letters is no longer making an operating profit, as we speak—cash will be required. To do the things that we talk about in the report, such as diversification and what Swiss Post is doing with electronic solutions, we will need money.

Q 234

Tom Blenkinsop: The reason why I ask is that the Business and Enterprise Committee asked you that as well, and you said that you had not done the analysis on the issue. That Committee raised the fact that if the pension deficit were removed, it would give Royal Mail Group an additional £280 million a year, and if access pricing were set at a level that covered Royal Mail’s overheads as well as its marginal costs, that would give it another £100 million a year. Do you not think those elements could give a better outlook into where the capital could come from, and how much is needed?

Richard Hooper:  That comes back to a previous question about whether the three key recommendations are locked together or can be taken à la carte. I am going to stick to my view that those are locked together for the reasons that I have given. In my view, it would not solve the problem if you just did parts 2 and 3. That would not solve the issues that we are facing.

Q 235

Tom Blenkinsop: Do you see how it is hard from my position hearing you say that we need extra capital investment, but not actually getting a figure?

Richard Hooper:  I can understand it from your position. I think the chief executive answered the question; I think that the figure she gave was £2 billion to £3 billion.
I am being straight with you. I do not have access; I am not privy to Royal Mail’s confidential business plans, and in a way I think it is quite helpful that I am not. All I can say, looking at the numbers—I have worked with one or two extremely good postal analysts in the City whom I trust and respect, and who know a great deal about this business worldwide—is that when you actually look at the figures and look at the balance sheet, there is a significant requirement for money. Simply solving the pension deficit, or giving Royal Mail 15% more on access prices, would not solve the problem.

Q 236

Priti Patel: Earlier, you made the remark that with private sector capital come private sector disciplines. That would mean quite a cultural change in the Royal Mail, in the way of working not only with management but with employees. What is your view so far? Do you feel that Royal Mail has a real understanding—across the board, with management and employees—of what the Bill will actually mean for the cultural change that will come to Royal Mail?

Richard Hooper:  I think the answer is yes. If you talk to Mark Higson, the managing director of Royal Mail Letters, who has played a major role in the modernisation of the company over the past two or three years, he has great clarity. When I have talked to people from Gatwick, Cardiff and Northern Ireland, I have felt that there is a great deal of clarity as to what will be required. They realise that it is a tough world out there, and that the digital media are not the ideal competitors—they eat your lunch. I think there is a strong sense of that; I think there is a strong sense in the union. You only have to look at that modernisation agreement, which is not just tinkering around the edges. That document talks about the number of sorting centres, which are critical-infrastructure, capital-investment items in Royal Mail.
Moya Greene has come in as a new chief executive; she came from Canada Post, where she has done a lot of such work before, and I think she will lead that extremely well. I get no other sense from the board, from the management or from the members of the work force whom I have dealt with. I feel great enthusiasm. At Gatwick, there was a wonderful guy who was doing a particular thing with packets and parcels. I said to him, “Tell me how you do this,” and he explained how he did it. He said, “Would you be interested to know how I used to do it?” I said, “I would.” He said, “Right!”, and off we marched across the sorting centre, and we went back to where he was before. He then showed me how he used to do it. He said, “It hurt my back, and I walked about 4 miles a day, which I did not need to do. Where I am doing it now, there are two of us, and we have a special frame that has been constructed.” That was a perfectly normal member of the work force totally engaged and loving every minute of it.

Q 237

Michael Weir: Earlier, you talked about how, by bringing private capital into Royal Mail, you will not get any political intervention in commercial decisions. However, do you not accept that in Royal Mail there is a major political intervention in the shape of the universal service obligation, which is there for a reason? Are you satisfied that if there was a sale of 90% of Royal Mail to a private buyer, it would continue to operate the USO in a satisfactory manner for all the areas outwith central London that you referred to earlier?

Richard Hooper:  First, can I just say that Mr Weir was the first MP who I ever talked to, back in 2008? I had the most wonderful conversation with him, in which he made one key point that resonated right through the report. He said, “Mr Hooper, do not forget that when we talk about social and economic glue in rural areas, we are talking about not just granny and you and I, but small and medium-sized businesses that are critical parts of rural areas. They do not just work in towns, so the universal postal service is critical to their functioning.” I was extremely grateful to Mr Weir for making that strong point, which resonates still.
I believe the answer is part 3 of the Bill; it is about the regulatory framework. Ofcom is a tough regulator, and there is much evidence of its toughness. It clearly has the mandate to ensure that the universal postal service is maintained, and there are elements in the Bill about how it might be changed in the future. I am under no doubt that properly regulated, a company that is 90% privately owned will not be allowed to renege on its universal postal service obligations.
I think there is a slight paradox about the universal postal service. With the fact that you have access on six days a week to 28 million households in the UK, you could argue that that is a liability, but you could also argue that that is an incredible marketing asset, particularly if you have this wonderful brand called the Royal Mail, which is a great brand. You have this fantastic brand and an infrastructure that allows you access to 28 million businesses and homes across the UK without fear or favour. I think the combination of those two will mean that you will not lose it in private hands.

Q 238

Michael Weir: However, do you accept that operating the universal service in rural and island areas, for example, is a considerable cost to Royal Mail, and will be on a private operator? Other providers get the benefit of that—the last-mile service, or whatever it is called. I just wonder whether we will not find, in a privatisation, huge pressure from the privatised company for a reduction in the terms of the USO as part of its cost-cutting measures.

Richard Hooper:  There are always those sorts of pressures on regulators, and I return to the view that Ofcom is a tough cookie. It deals with BSkyB, the BBC and Vodafone—big companies. One of the disadvantages of Postcomm, which is no criticism of it, is that there was, as Nigel Stapleton mentioned on Tuesday, a one-to-one relationship, and therefore it is more difficult. Here we are talking about a regulator that deals with the big battalions; one that I think deals with them with evidence, data and evidence-based regulation. I therefore do not feel that it will just be rolled over by a private-sector investor.

Q 239

Michael Weir: On a final point, the Bill gives power to Ofcom to effectively levy other operators to contribute to the cost of the USO. Do you think that that is likely to be of use in bolstering the USO? Is it likely to happen?

Richard Hooper:  I think that in the Bill there are two or three mechanisms that are cleverly worded to ensure the future. I want to be absolutely clear now. I have said to both management and the unions: “Right now Royal Mail, no excuses, you’ve got to modernise, to accelerate modernisation. At the moment, we’re not going to talk about compensation funds that suddenly say, ‘Perhaps someone else will pay for it.’ Going from six days to five, which saves £250 million a year, you are not going to get that, you are modernising. When you are fully modernised and you are best in class”—we can measure that in x years’ time—“if the universal postal service is a major financial burden, you can then look at compensation funds, and so on.” I think that that is a perfectly reasonably way forward. But you, as politicians, should be tough and say, “You’ve got to be best in class. When you are that, if it becomes a huge burden or becomes impossible, we will look at that.” Taking something like the regulation of payphones—who has recently thought about the matter? The coming of the mobile phone has fundamentally changed the way in which you think about payphones, so as we move—

Michael Weir: Except in rural areas where you cannot get a signal.

Richard Hooper:  That is exactly why you need regulation.

Q 240

Karl Turner: Just picking up a point that I think you have intimated already, we know that currently there are 11,900 post offices and that 4,000 are profitable. That leaves 7,900 that are not profitable. My question is in two parts. First, is there a minimum requirement of access points to make the universal service obligation work, and secondly, what will happen to the 7,900 non-profitable post offices, if there is no protection in the legislation? I cannot find any protection in the Bill for those post offices.

Richard Hooper:  My study was very much on the Royal Mail and not postal services. Neither Government asked me really to look at post offices, except as the front office of Royal Mail. So, I did not study that in detail.
Just recently, the Government announced a significant increase in funding for post offices. My view was always that post offices were not fundamentally a commercial operation—there was a strong social and public purpose to them—but you could look at Royal Mail slightly the other way around. It basically has a strong commercial business and a very important throbbing heart of the universal postal service. So, I looked at the issue in slightly different ways.
The Government have announced plans for the future of post offices, have increased the funding for that and have put forward a number of ideas about how to improve profitability, and it is entirely possible that the mutualisation idea could help that employee engagement. As we know, 97% of all post offices are not Crown post offices; they are run by small and medium-sized businesses, and so there is a strong incentive to get it right.
I think that the current figure of 11,500 is right, and I think that the Government have said that they are not going to reduce that figure. When you look at this in terms of distance—90% of the population are within a mile or something—that is a very important figure. So, there are big challenges in the Post Office; they are not ones that I have studied, but they need care, attention and good management. There is a strong argument for saying that Post Office and Royal Mail are fundamentally different businesses. Basically, the Post Office is a retail outlet—a big retail network—and the Royal Mail is fundamentally a logistics business. By, in a sense, splitting them in two, you might get an even stronger management focus on both the logistics side and on the retail side than at the moment.

Q 241

Karl Turner: I think that clause 30 in part 3 of the Bill obliges Ofcom to ensure a collection and delivery service, but it does not seem to oblige it to protect post offices. Do you think that that is required? To assist with universal service obligations, you are required to protect the access points as well as collection and delivery.

Richard Hooper:  I do not know the answer to that. I will be quite honest. I am tempted to say what President Obama once said, which is, “It is above my pay grade.” Clearly, the regulatory framework sets up the regulation of Royal Mail rather than post offices, but I think the access points of pillar boxes and of post offices are critical to this. I think I would defer to you what the right number is and how that is regulated.

Q 242

Karl Turner: It strikes me that the reason why the first part is protected is for small business. It is essential for small businesses to have collection and delivery for six days a week, but, in my view, the social aspect has not been considered enough. Would you agree with that?

Richard Hooper:  No. I have said that, fundamentally, post offices have a very strong—probably overriding—social function, and the issue is how to commercialise that and make it more profitable.

David Amess: Colleagues, we potentially have five minutes left if anyone else wants to ask a question, but, that not being the case, I thank Mr Hooper, on behalf of the Committee, very much indeed for the time that he has spent with us. I now ask our two Ministers to take their places.

Witnesses: Mr Edward Davey, Minister for Employment Relations, Consumer and Postal Affairs, Mr Edward Vaizey, Minister for Culture, Communications and Creative Industries, Jo Shanmugalingam, Department for Business, Innovation and Skills, and Rachel Clark, Department for Business, Innovation and Skills, gave evidence.

Q 243

David Amess: I welcome our witnesses. I had initially thought that we were just going to have the two Ministers, but I have just been advised that we have two civil servants as well, so I wonder whether everyone could introduce themselves. If they feel it appropriate, perhaps the two Ministers will make some sort of opening statement.

Jo Shanmugalingam:  I am Jo Shanmugalingam. I lead the Postal Services Bill team in the Department for Business, Innovation and Skills.

Mr Davey:  I am Edward Davey, postal affairs Minister.

Mr Vaizey:  I am Ed Vaizey, communications Minister.

Rachel Clark:  I am Rachel Clark. I head up the team dealing with postal services regulation in BIS.

Mr Davey:  It is a privilege to come here and give evidence as a witness before we start our scrutiny proceedings. I think the only thing that I would really like to say, because I want to give you the maximum amount of time to question me, is a big thank you to a few people. First, I thank Richard Hooper for the excellent work that he did for both the previous Government and for this Government. It was extremely helpful, and it really got a lot of consensus behind the sort of things that we are proposing. It is no coincidence that the Bill is not that dissimilar from the 2009 Bill that the previous Government produced, because we lent so heavily on Richard Hooper’s report, so we are very grateful to him.
I would like to echo what he said about the civil servants who have worked on the Bill and, indeed, about people in Royal Mail, Post Office Ltd and the wider industry, who have all played a part, but particularly the officials. Obviously, I am a relatively new Minister, but I have been deeply impressed by their work and their advice. It is sufficient to say that all the mistakes are mine.

Q 244

Gordon Banks: I want to speak to the ministerial team about the inter-business agreement. We have heard, through the evidence process, that Consumer Focus said this morning that it would like to see that for as long as possible. We have heard the National Federation of SubPostmasters talking about 10 years, and, indeed, we have heard Richard Hooper mention five years in his evidence to us. We have also heard it said that, when the prospectus for the sale goes through, there will be a statement in the prospectus about the IBA. Why is there no time scale in the Bill? Linked to that, why doesn’t the Bill oblige the universal service provider to utilise Post Office Counters as part of that universal obligation? I am sure that I will have some supplementary questions to your response.

Mr Davey:  The inter-business agreement is what it says on the tin—it is an agreement; it is a contractual relationship. It is currently between Royal Mail and Post Office Ltd, albeit that they are in the same group, but it is a commercial agreement between those two companies now. No previous Government have thought to put it on any different footing. I am pretty clear that there will an agreement in the future, but it is for the two companies, which will be separate and not in the same group, to reach that agreement. I refer the Committee to what the chief executive of Royal Mail, Moya Greene, and Donald Brydon, the chairman, said. Moya Greene said it was unthinkable that there would not be a long-term relationship between Royal Mail and Post Office Ltd. Donald Brydon said that he wanted to have the longest possible legally permissible agreement, and that is what he intends to do. So, I start from that basis in response to the question, but I would make this really important point: the drive behind our reforms to the post office network is to make it much more commercially viable.
As the Committee has already heard, a large number of the post offices are currently not commercially viable and, therefore, require subsidy. The analysis that I have seen is that if we do nothing, that subsidy will grow and grow and grow. If we do not take action, invest and put forward this proposal, the estimate is that the subsidy will grow to £400 million a year by the end of the spending review, which I do not think is sustainable. That is why we have a whole set of policies to invest in and transform the post office network, and a whole set of other polices to turn it around. By doing that and by improving customer service—having longer opening hours in many post offices, reducing the queues and improving the customer experience, so that there are more services available across the post office network—the subsidy requirement will be reduced. That is the way to think about the future of the post office network.
We have to equip the post office network for the future. As Richard Hooper made very clear, the volume of letters is going down and down and down. The post office network’s revenues are therefore affected by those same digital trends, because its mail business is going to go down. We have to look at other ways of getting business through the post office network, not just surviving on the past. For all those reasons, I think that our approach is the right approach, and I just do not think that it is possible—to return to your original question—to enshrine an agreement into statute law. Governments have done so in the past, but we are not going to.

Q 245

Gordon Banks: But if it is unthinkable, as Moya Greene has said, that the link will not be broken between Royal Mail and Post Office Ltd, why not put it in the Bill? You have talked about non-viable post offices. Surely, a long-term IBA is a potential solution for those post offices that are not viable. A long-term business arrangement would be very important to the many small and medium-sized enterprises that run post offices and need to invest in their businesses, at the same time as having a contract of this nature. A long-term IBA would, therefore, be a further encouragement for these businesses to invest in their businesses and improve the quality of the service that they provide. Would you agree with that?
Are you able to confirm that the private Royal Mail would be able to insist on renegotiating any IBA that might exist with Post Office Ltd? Although it is not quite the same situation as with Serco and its suppliers, in such a position you have a major player and somebody who is dependent on the major player. Royal Mail will have all the cards in its hand at that point, so it is very important to understand whether Royal Mail will be able to insist on the renegotiation of the IBA.
My final point is whether the Government have done anything to establish what the impact would be of utilising a variety of service providers instead of the Post Office. What impact would that have not only on post offices, but on customers?

Mr Davey:  Well Mr Banks, I hope that I can answer all those questions. Quite a few were wrapped up in that, but let me see whether I can answer them all. If I miss any, please come back.
You started off by asking why we are not putting that into legislation. I do not want to repeat what I have said, because the first question was quite similar to that, but I want to try and get this point across. If you actually wrote that there should be a contract between two companies that are going to be separate companies into law, I think that it would be subject to serious legal challenge. I am not aware of any precedent, and I think it would be a bizarre thing to do. Previous Governments have not thought it necessary, which is why we do not think it is necessary. It would be open to challenge.
When we are talking about sub-postmasters having reason to invest in a business, you are absolutely right; we have to give them confidence and certainty going forward. They have not had that for a long time. When you talk to sub-postmasters, they have gone through a searing experience in recent years, and they want to be reassured that things are going to get better. However, I do not think that you do that by putting into law an agreement that is subject to legal challenge and does not actually deal with the underlying economics. My whole approach, both to Royal Mail and to post offices, is to deal with the underlying economics. I think sub-postmasters will be rather more convinced that they can invest if you deal with that, if they know that new services will be coming across their counters, if they are clear that the Government have a clear vision for the future of the network and if they know that parts of the network will not be closed in the way that they were.
You have asked about other operators and providers. One of the great things about the post office network is that it has nearly 12,000 outlets, and it has a real competitive advantage because of its size. If you take all the high street supermarkets and put them together, you have a network of just 4,000. If you take all the banks and put them together, you have a network of slightly less than 10,000, I think. They tend to be in the same streets and not in rural areas, as post offices often are. The Post Office has a very different network, which is much larger than any rival. That is its strength. Even after the closures—I think 7,000 post offices closed under the previous Government—it is still a large network. We believe that we need to play on that competitive advantage.
On the consumer experience, if you look at the market research, it is not about the network and accessibility. It is about queues, and about post offices not being open long enough and not having all the services that consumers want. That is what we are going to tackle. We are going to tackle the underlying economics, which I think is the right approach, as opposed to thinking that you can solve economic matters by passing regulations and laws.

Q 246

Gordon Banks: Can I press you further on that? The impression that you have given, or are leaving me with, is that you do not see the IBA as being the lifeline to post offices. You see new product development as being that lifeline. Is the IBA, in your opinion, of lesser importance? And, on that link as well, we have talked about 10 years, five years, 15 years or whatever; how long do you think that the IBA should last for?

Mr Davey:  I think that the relationship between Royal Mail and the post office network is really important. When you talk to them—you heard Tuesday’s evidence—both parties feel that they have a long-term future working together. They are dependent on each other and that is right. I agree with that; it is really important. I cannot envisage a situation where Royal Mail would want to leave a vacuum for its competitors—other parcel companies, courier companies and so on—to come in and use the space of the post office network, which is such a trusted space in the public’s mind. It would be shooting itself in the foot, and I do not think that Royal Mail would do that.
Royal Mail is likely to want to put its relationship with the Post Office on a contractual footing, as it has done in the past. We heard from Donald Brydon on Tuesday, and that is what he wants to do. He wants to refresh that relationship, prior to the separation, and he wants a deal that is as long as possible. When you listen to Donald and Moya Greene who, with respect, are expects in the industry and are running the corporations, you get the impression that they want the relationship to continue. I am rather more reassured that the people running the businesses want that relationship to continue than I would be if we passed a law that could be subject to legal challenge.

Q 247

Gordon Banks: I do not want to labour the point, because it is important that other people get in, but the Minister did not answer all my questions. I asked whether you thought that the IBA was less important than new product development, and how long you think the IBA should be for. You did not answer either of those questions.

Mr Davey:  On the first point, both are important. There must be more product development. If mail flows are going to go down, we must have other services. That is really important. In the near term—the next five to 10 years or whatever—it is important that mail goes through that network. However, if we rely only on that and see the flow fall, the revenue will not be there for the post office network. We need that product innovation in the medium and long terms.
What length of time do I think the IBA should be for? Let us be absolutely clear as there is some confusion: the Government are not party to the IBA. I have never seen the IBA and neither, I believe, have other Ministers, although I cannot speak for the previous Government. Why? Because it is a contract between Royal Mail and Post Office Ltd. I am led to understand that the current IBA was signed for five years. I heard what Donald Brydon said, and I would certainly agree with the chairman of Royal Mail.

Q 248

Andrew Stephenson: I want to pick up the evidence that we heard on Tuesday from Billy Hayes. I put to Mr Hayes the point that as well as the shared ownership part of the Bill, we are also dealing with the historic pension deficit. I told him that on the face of it, I thought that the Bill represented an exceedingly good deal for the employees of Royal Mail. He seemed to disagree. I want to get your opinion. Have you been disappointed by the union’s response to the Bill?

Mr Davey:  I found Billy Hayes and Dave Ward to be very reasonable people whom I have met on a number of occasions. I made it clear to them that as a Minister, my door is open to them and that I want to continue that dialogue. That is my job. They have raised points on behalf of their members, which is exactly what they should do. I am not going to say that I am disappointed with them. I note in passing that Billy Hayes was kind enough to say that I am more emollient than Lord Mandelson, although I would not necessarily want to draw any further conclusions from that.
I hope that Billy Hayes recognises that there are two key parts of the Bill for his members. I think that the solution for the pensions of his members is really good. The provisions in the 2009 Bill were good, and we have made slight improvements to them. It is a good deal for Royal Mail employees. When I go round delivery offices in Kingston and Surbiton over Christmas, I will be telling people that I think that they have a great deal, and I am delighted that we have been able to put it forward. I hope that the CWU will appreciate that.
On employee shares, I heard what was said in answer to those questions, and I am not surprised at that. I think that union members will be pleased that the Government are providing them with a chance to share in the future profitability and success of Royal Mail. I am not necessarily sure that all union members agree with Mr Hayes. Ultimately, the trade union—quite understandably—wants to ensure that the terms, conditions and jobs of its members are looked after. But in the past 13 years, 65,000 jobs were lost in Royal Mail under public ownership. The union was very reasonable to sign up to the agreement with Royal Mail to modernise, which sees jobs effectively going. The management and unions are to be congratulated on coming to that modernisation agreement and accepting that automation and technology will have consequences for jobs. We will act in a compassionate and humane way, and people who lose their jobs will be treated absolutely properly.
We heard from Richard Hooper and Moya that in the world class mail project, which is right at the cutting edge of where Royal Mail needs to be in its sorting and delivery sites, the health and safety record has improved. Modernisation and our proposals are in the interests of Royal Mail employees, not only because of pensions and employee shares but because it is the only way to ensure that their jobs are sustainable in the future and that their working conditions continue to improve. As Minister, I care passionately about those issues.

Q 249

Andrew Stephenson: Staying on share ownership, we have had good debates in some of the evidence sessions about the different forms it might take and whether it will be the John Lewis model or a kind of trust. Do you know when there will be more information on what form the Government think it should take or the value of the shares? Is it going to be 10% or will it be more? Have you got a timetable for that information?

Mr Davey:  I am glad that you asked that question. We have not been detailed and specific—beyond the clauses in the Bill—because we want to keep maximum flexibility as we go forward with the transaction and how we do it. That is right in terms of both securing Royal Mail’s future and getting a good deal for the taxpayer.
With regard to flexibility specifically for employee shares, we will want to discuss with Royal Mail and, indeed, its employees and any future vendor, how that should be set up. As we deliberate and scrutinise the Bill, I am keen to hear what parliamentarians think about that.
In due course, I am going to the all-party parliamentary group on employee share ownership, which is doing a report in this area. I am keen to hear its advice. We are listening to some of the witnesses who gave evidence on Tuesday—the Employee Ownership Association, for example—about how we can do it. I have my own views, which I am happy to share with you now about how we might go ahead. In matters such as employee share ownership and mutuality, it is important that you consult and discuss and give yourself—in an enabling Bill—some flexibility to make sure you get it right.
So, how am I minded? As was debated on Second Reading—I think it came from Labour colleagues—longevity in the employee share relationship is important. Therefore, there is a lot of attraction in the employee share trust model, so that the benefits to productivity and to individual Royal Mail employees are ongoing. There is clearly an attraction there.
But that is not to say that we should completely discount individual share ownership as well—or, more likely, a mix of the two. We should not be tying our hands here; we should be looking at the options. We might not have an initial public offering and not sell shares in the open market—individual share ownership does not look quite right there. However, if we were to go to an IPO, there is no reason why we could not do a mix and keep the advantage of the trust for the longevity I referred to earlier, as well as potentially offering individual shares. We are quite open and we want to have a good debate. I look forward to hearing colleagues’ views.

Q 250

David Wright: On that specific point, if we just look at process, in past disposals and privatisations we have seen a paving Bill. How are you minded to report back to Parliament? What you are saying is that you want to see the Bill progress, but—in answer to Mr Stephenson’s perfectly reasonable, in my view, question—there has to be some flexibility and discussion around that.
How are you going to report back to Parliament? There is a process issue. Do you see a second piece of legislation coming forward? How do you envisage this working? Parliament may give you authority to pursue the Act—if it becomes one—but how do we know how you are implementing it and how do we stop you from doing something that we do not want you to do?

Mr Davey:  There are two ways of replying to that. First, in clause 2, we are putting a requirement on ourselves to report back to Parliament. No doubt, when we debate clause 2, you will want us to do far more than that. I can just imagine the amendments that you will put forward.
Without wanting to look too far ahead to that debate, I would say that if you look at all—I could be wrong about that, but certainly most—of the past privatisations where there has been paving legislation, there has not been a subsequent vote, and there is a very good reason for that. When you are doing a transaction or a deal, and getting European state aid and the other things that you have to do, you need certainty, to get value for the taxpayer and to ensure that you get the interests of Royal Mail right.
If there is uncertainty about whether there could be something in future that could scupper everything, you might not get a good price or the risk capital you need into the company that you are privatising, which in this case is Royal Mail.

Q 251

David Wright: How do you envisage the report being laid?

Mr Davey:  I refer the hon. Gentleman to clause 2.

Q 252

David Wright: Are you just going to pop it in the Vote Office?

Mr Davey:  I still refer the hon. Gentleman to clause 2; we will make a report to Parliament.

Q 253

David Wright: So, are you just going to pop it in the Vote Office?

Mr Davey:  Well, there will be a Command Paper in the normal way, and I think that that is the right way to make a report.

Q 254

Gregg McClymont: Why are access points different from pick-up-and-delivery, which will be protected by statute?

Mr Davey:  Are you referring to the access points in Royal Mail’s licence?

Gregg McClymont: Yes.

Mr Davey:  We will see the requirements on the Royal Mail in the universal service order, which is the parallel to the licence that Royal Mail has at the moment. When Ofcom makes that order, I imagine that it will look to the licence that has gone in the past under the previous regulatory regime and try to mimic most of it. It is not for me to tell Ofcom—the independent regulator—exactly what it will put in its first universal service order.

Q 255

Gregg McClymont: But it could be for you to put into statute provision criteria on access points.

Mr Davey:  It could be, but we do not think that that is the job of Government; the job of Government is to set the regulatory framework. As you have heard from many of the witnesses, we have a robust regulatory framework; there are quite a lot of similarities between the regulatory framework we are putting forward and the 2009 Bill.
As you know, Ofcom was the regulator that the previous Government chose, and that was the right choice because of the changes in the market. The only significant changes that we have made have made it more robust and have dealt with some of the problems in the 2009 Bill, which could have caused problems for the universal service provision.

Q 256

Gregg McClymont: I am still unclear as to why the Government consider access points to be different from pick-up-and-delivery, which will be protected by statue. You referred to the 2009 Bill, but that would have led to both companies remaining in Government ownership, but in this case there will be a privatised Royal Mail. Why are access points less important than pick-up-and-delivery, which will be part of the universal service obligation?

Mr Davey:  I guess that the problem I am having with your question, Gregg, is that what we are taking forward is exactly the regime that is in the Postal Services Act 2000. We are not trying to do anything unusual here, and we are putting the onus on the regulator to regulate in that area. That is what was proposed in the 2009 Bill and what is in the 2000 Act.

Q 257

Gregg McClymont: Can I ask a second question somewhat related to that? Am I right in saying that the Secretary of State will have the power to remove services from the universal service order?

Mr Davey:  I am glad that you asked that question. You are referring, I think—I want to give you the right answer—to clause 29(5), which we will no doubt come to. The reason why we put that forward is that it is more about who is regulated, as opposed to what is regulated. There are a number of postal operators, such as courier companies and express mail companies, that are not regulated at the moment. There is a danger that they would be unclear and uncertain when Ofcom starts, if Ofcom chose to regulate them. We wanted to remove that uncertainty.
At the moment, those companies are regulated only on consumer protection grounds—for example, on complaint handling. We wanted to make sure that they did not, by a mistake in legislation, come under the scope of regulation at the start of Ofcom’s jurisdiction. That is the sole reason why clause 29(5) is in the Bill.
I do not know whether this lies behind the question—I am sure that you would not want to suggest that we would want to do this—but you might think, if you read this in the wrong way and thought that we had the wrong intent, that the Bill wants to change what is in the Royal Mail’s licence, which will be in the universal service order.

Q 258

Gregg McClymont: I would never suggest that. Can I present a scenario to you, which you may find a somewhat cynical view of the provision? We have a situation in which the Minister can exclude services from the universal service order, but cannot add them. In theory, Ofcom will make a decision on the universal service order independent of any interference or influence.
Do you not agree, however, that it is human nature not to like to be second-guessed? It may be possible that Ofcom will want to know discreetly how the Secretary of State’s mind is moving as regards the universal service order and the exclusion of services from it. Once that mechanism is in place, where the Secretary of State can remove services but not add them, you could end up with a situation where Ofcom announces the removal of services from the universal service obligation and the Minister comes to Parliament, or the media, and says, “My hands are tied—there is nothing I can do about it. I cannot add services, I can only exclude them.” Is that not a potential problem?

Mr Davey:  If you are still discussing clause 29(5), which I think you are, it is very clear that that refers only to the first universal postal service order, not to every universal postal service order. Whether it is the Secretary of State or myself, we are making it absolutely clear, on the record in Hansard,that the intent behind that is to make sure that companies that are not regulated for lots of services at the moment will not be regulated when Ofcom makes its first review. That is to get regulatory certainty for private companies that are not regulated. We think that that is our duty. We do not want to give regulatory uncertainty to mail and courier companies out there.

Q 259

Gregg McClymont: Is there not a danger of unintended consequences? Your intentions are obviously admirable, but consequences are what matters.

Mr Davey:  The consequences would come about only if the Secretary of State did something that he is telling you he is not going to do.

Q 260

Gregg McClymont: Okay. I am glad that that is on the record.
You mentioned subsequent universal service orders and Parliament’s role. Am I not right in saying that the second universal service order and subsequent universal service orders will not receive parliamentary assent in terms of access points? Access points are not part of the Bill in that sense. Is that right?

Mr Davey:  As of now.

Gregg McClymont: As of now?

Mr Davey:  When the licence that the Royal Mail has with Postcomm, the current regulator, does not come before Parliament for approval.

Gregg McClymont: That has gone on the record. Thank you.

Q 261

Damian Collins: I want to continue with the regulation theme. On Second Reading, the Secretary of State said that the present
“deregulation provisions do not give the Royal Mail sufficient protection against unfair competition.”—[Official Report, 27 October 2010; Vol. 517, c. 350.]
I was disturbed. I would welcome the Minister’s comment on the provisions contained in schedule 3 of the Bill and how they may be helpful in ensuring a fairer level of competition with providers accessing the service that Royal Mail provides.

Mr Davey:  We have introduced a number of provisions to the Bill that differ from the 2009 proposals, which I hope will ensure that the universal service provider is not unfairly affected. There is an overriding duty on Ofcom to secure the universal service, which was in the 2009 Bill. We have added the duty to ensure the financial sustainability of the universal service provider. We have toughened up the duties on Ofcom to look after the universal service provider. That is a very important change. When we debate part 3 of the Bill, I hope colleagues will realise that we have responded to the concerns of Members of all parties that Royal Mail has been unfairly treated in the past.
We have also changed the access provisions; I forget which clause that is in, although I can find out shortly. Ofcom will be able to mandate access to Royal Mail’s network—primarily its sorting centres or inward mail centres—only if it meets several conditions simultaneously. Effectively, we have put “and” where it said “or” in the previous Bill. That toughens up the regime, which is welcome.
We can expand more when we debate that clause in detail, but in brief, if we had not done that, I fear that competitors might have requested access to Royal Mail’s network at almost any point they wanted—I am not saying that they would have done that, but that they might have had the power to do so. That might have been quite disruptive for Royal Mail’s management and very costly. I believe that it would have imposed unfair costs on Royal Mail. I think that that action has improved on the 2009 Bill.

Q 262

Damian Collins: I have one final question. The conclusion to the Hooper report sets out the development of new digital businesses as an opportunity for growth for Royal Mail. I would welcome your views and the views of the Minister for communications on that and on how you think the Bill will facilitate that process.

Mr Davey:  I made the confession on Second Reading—it is good to make confessions regularly—that before I was elected in 1997, I was a management consultant specialising in postal administrations. I worked for a number of post offices and wrote a number of reports. Although one Committee member believes that I was involved in privatising post offices around the world, I was not. I have never privatised a post office before this one.
For the record, we are privatising Royal Mail. If you get into postie talk with the Universal Postal Union, which is the United Nations body that represents all postal administrations around the world, it talks about post offices, but they all have different names. We are privatising Royal Mail, which is the postal administration in the United Kingdom.
A lot of my work looked at the threat of digital media to what are effectively a physical delivery companies. I spent a year working for Posten, the Swedish post office, to analyse the threat of internet and e-mail to its mail flows, products and services. As a result, my consultancy got into looking at how postal administrations should position themselves in the digital age. That was in 1995, so it was 15 years ago when life was rather different. We looked at a range of value-added services from hybrid mail, which I am happy to talk about in detail if you want me to, and postal administrations getting into e-mail delivery services and other electronic services. You heard from Richard Hooper how he gets information about his local car hire company from Swiss Post. There are a number of products and services that use electronic services provided by different postal administrations.
There is a company called the International Post Corporation, which Maya Greene was a member of when she was chief executive of Canada Post Corporation. No doubt she is a member of it now, because Royal Mail is a partner shareholder of IPC. One of the reasons why it was originally set up was to look at these issues, although it has a much wider remit.
That is a long answer to your question, which is to say that there is a lot of scope for Royal Mail to get into that area. It has a lot of plans to do so, but because it has been in a relatively weak position—particularly financially—it has been worried that if it were to develop those products and services now, it might cannibalise its own letter volumes. Entering the market, therefore, and how you do so, is quite important, and on balance, it was probably right to hold back. With the capital that it will be able to access, however, and the freedom that it will have under the Bill, it will be much better placed to take advantage of the types of service that other post administrations have been involved in for some time.

Mr Vaizey:  Obviously, I echo what the postal Minister has said. When we talk about regulation and Postcomm moving into Ofcom, and Richard’s evidence about Royal Mail being part of a much wider landscape of communications, that is a signal that Royal Mail will no longer be an island. That is a huge opportunity.
I do not know enough about what Royal Mail is planning to do, but I suspect that having private investors will open up huge opportunities for it. It is also an extraordinarily powerful brand. I do not have any digital services from Royal Mail at present, but I have a “Postman Pat” app on my iPhone, which could signal a way forward.

Q 263

Karl Turner: I wonder whether I could press the Minister a little further on universal service obligations, which are composed of all sorts of things but which have two important elements—first, collection and deliveries and, secondly, access points. We know that the Bill protects the first, but it does not protect the second. I wonder why that is. I wonder whether that is more about ideology than anything else. On Second Reading, in answer to one of my hon. Friends, I think you described access points as “old-fashioned socialism”. Is it more about ideology than anything else?

Mr Davey:  On that point, let me reassure the hon. Gentleman that I am not ideological. The approach on ownership is more driven by what makes sense in this company.

Q 264

Karl Turner: Can I clarify a point? The question was in relation to regulating access points.

Mr Davey:  I had this confusion with the point made by the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East. Our approach is the same as that in the 2009 Bill and in the previous regulatory regime. Let us remember that those were gold-plated regimes from the European directive. We are not doing anything unusual in terms of either how postal administrations are regulated throughout Europe or how they have been regulated in the UK in the past. Interestingly, the European postal directive makes its regulatory framework irrespective of ownership. As I am sure that the hon. Gentleman knows, there are postal administrations in Europe that are already in private hands, and they are governed by the same postal directive with the same regulatory basis.

Q 265

Karl Turner: I think that that is right. Minister, only one post office has been given unfettered ability to close post offices, and that is Sweden’s. Will you comment on a report published by the UK National Audit Office in 2004? It states:
“However its attempts to reform its post offices network were drastic, poorly thought out, and initially were most unpopular. It is clear that Posten was acting freely and without government interference until the unpopularity of the changes introduced in 2000 onwards became apparent. At this point political pressure was brought to bear.”
I know you have a great deal of knowledge about that, given your background. Can you comment on it?

Mr Davey:  I can understand why political pressure was brought to bear in Sweden, because we had to suffer the closure of 5,000 post offices during the previous Parliament under two closure programmes, which was devastating for many communities. One thing that motivates not only the Bill, but our whole policy, is to ensure that we never repeat such a serious mistake for communities and people up and down our country. It is one reason why the legal agreement that the Government have with Post Office Ltd ensures that a minimum of 11,500 post offices are open. We are providing the funding for that and, more importantly, we are providing the changed services and the Post Office policy framework to deliver that. That experience is very different from Sweden’s and, more significantly, from what we have had in this country in recent years.

Q 266

Karl Turner: Can you guarantee that there will be no closures of post offices?

Mr Davey:  We have made it clear that there will be no repeat of the closure programmes. I know that you will pick me up by asking, “Will no post office close anywhere?” I think you will believe it is reasonable for me to say, because every other Postal Affairs Minister before me will have had to say, that I cannot guarantee that a post office in any particular village or town will not close at any time. That is for this reason—97% of sub-post offices are privately owned, and people may die, retire, move away or a range of things may happen that we cannot control, which is important to recognise. However, we have made a legal agreement with Post Office Ltd and provided the funds so that, over the next four years, there will be 11,500 post offices in the United Kingdom, which is a pretty big step forward compared with what we have been used to in recent years.

Q 267

Karl Turner: I am bound to be suspicious, Minister, given my legal background—the Bill definitely protects the first part, but not the second. I am confused about why the Bill cannot provide a mechanism for Ofcom to ensure a minimum requirement for post offices to be kept open. Why can that not be in the Bill?

Mr Davey:  First, let us remember that it would be a dramatic change of approach from the past. The last Government and, indeed, previous Governments, did not think that the number of post offices should be written into statutory legislation. Postcomm did not regulate the number of them and, in fact, it hardly regulated the Post Office side of Royal Mail Group at all. It only provided for a report, which we have made provision to repeat in the Bill for Post Office Ltd. So, regulation has not been involved in the area that you are talking about.
If you think about it, post offices are privately owned. To come back to that point, it would be odd to create a statutory duty to keep post offices open, particularly given the detailed access criteria that we have, in such a way that Post Office Ltd would be committing an offence when the genesis of that offence was a private operator closing its post office. It would be rather unfair to Post Office Ltd to put into law that it would commit an offence for the actions of someone else.

Q 268

Karl Turner: Finally, on the Swedish model of Posten, am I right to say that it was only possible to mop up any difficulties, because that was still state-owned? Is that right or not?

Mr Davey:  I have to be clear that I did not work for Posten on this particular issue, and I do not know what happened in Sweden on that matter. So, I am not in a position to answer why something did or did not happen.

Q 269

Karl Turner: But the Government were able to intervene and to mop up the difficulties, because they had a stake in it. Is that not fair?

Mr Davey:  First of all, as you know from the Bill, the Post Office Ltd will either be 100% owned by the Crown, which will be the same as the position in Sweden, or it will be a mutual. I very much hope that we will come to the debate about our mutualisation proposals, because I am particularly keen on them. I think that a mutualised model is one of the means by which we can see not just a sustainable future for post offices, but a renaissance for them. I do not think that moving to a mutual would put the post office network in a worse position than the one you are describing in Sweden.

David Amess: Just before we move to Rebecca Harris, Gordon Banks wants to make a quick point.

Q 270

Gordon Banks: If I can just take the Minister back a couple of moments to when he talked about the £1.34 billion investment, does he envisage any similar kinds of investments in the post office network in the future, or is this it?

Mr Davey:  We certainly imagine that there will be a need for continuing subsidy. Although our strategy is to try to reduce the need for subsidy to make the network more financially viable, I think that a point will come when there will be remote and even semi-remote rural post offices that, even when we have made our reforms, will not be able to survive without subsidy. We are certainly committed in the policy to continuing that sort of payment. It is difficult to say whether we will need further injections of large amounts of money after this spending review to continue the transformation. I would not be surprised if we will need some more, but I cannot pre-judge the next spending review.

Q 271

Rebecca Harris: I want to talk about the pension deficit and the Government’s commitment to take it on. It is clearly a great deal for Jane Newell’s pension plan members and for Royal Mail, because it is already holding it back. Can you talk about how this will also be a good deal for the taxpayer? A lot of people would like their pensions propped up by the Government, and they are going to be paying for this. Moreover, given that you are looking to privatise Royal Mail, do you have any idea of the time frame you will set out to make the division between the new Government scheme and the Royal Mail pension plan?

Mr Davey:  In terms of the taxpayer, that is a very fair point, because this is a pretty generous deal. It is the right deal. For the Government to take on liabilities that are bigger than assets to the tune, according to current valuations, of more than £8 billion is quite an ask. I think that is ultimately in the interests of the taxpayer, however, because we want to see sustained capital investment in Royal Mail. If you left the pension deficit, given the size it is with Royal Mail, you would not get that investment. In order to get a better future for Royal Mail and a long-term better deal for the taxpayer, I think this is the right package. It is the package that Richard Hooper and the previous Government proposed, and I think it is the right way. The Treasury, which is the ultimate guardian of the taxpayers’ interest, has certainly agreed to it.
You make a valid point about how we will offer the solution to this. As we said on Second Reading, it is vital to ensure that the Royal Mail pension plan has an appropriately sized pension plan going forward. The liabilities of Royal Mail are currently more than 50 times annual profits. By comparison, the liabilities of an average FTSE 100 company are close to one times profit. That gives you another measure of how massive the pension deficit is.
Since Second Reading, we have been considering when the dividing line, or the cut-off, should be between the liabilities that the Government will take on and what will remain with the ongoing Royal Mail pension plan, which will be with the company. We have reflected on that and come to the conclusion that the cut-off date will be as close as is practical to the date of the sale of the shares in the business. We will, no doubt, tease this out a bit more when we debate those clauses, but based on an illustrative cut-off date of 31 March 2012, which I think is a sensible one, our estimates are that that would leave liabilities of about £1.5 billion with the plan. That relates almost solely to the salary-link liability, which, again, is a bit of a technicality, and I am sure that we will talk about it during the passage of the Bill. Given that those liabilities are based on salaries, which Royal Mail will control, we thought that they should not come to the Government, because we will not control them, but that they should stay in the plan.
The key thing is that, at the point of transfer, the RMPP—the Royal Mail pension plan—will be fully funded. That will reassure the company and the RMPP’s beneficiaries, and, indeed, I think it will help the sale. So that is the approach we are planning to adopt.

David Amess: Before we move to Tom Blenkinsop, Priti Patel wants to come in on that point.

Q 272

Priti Patel: On the pension deficit—particularly on the long way it still has to go, because it still has to go to the European Commission—what are the potential implications for the pension plan should the European Commission say no to transferring the pension deficit or transferring the liabilities?

Mr Davey:  We are pretty confident that it will not say no, not least because we have experience of the previous Government’s attempt to do this. The previous Government were engaged in discussions with European Commission officials, so we can refer to that previous dialogue and that previous correspondence. We are fairly sure that it will agree to a solution for the pension deficit that has the shape and feel of what is included in the Bill.
When we come to debate part 2, colleagues will see that we have left ourselves some flexibility, because we will have to have those negotiations. Although we are fairly confident that the overall package will be acceptable—I cannot be 100% sure, but we are as sure as we can be—the European Commission may ask us to do various things, so we have to retain a certain degree of flexibility.

David Amess: We have eight minutes left, and four colleagues want to make points.

Q 273

Tom Blenkinsop: Thank you, Mr Amess. I will be as brief as possible. What is your estimate for the capital requirements of Royal Mail once the pension deficit is dealt with and the regulations are put on a fairer basis?

Mr Davey:  The truth is that I do not know, but I am sure that it will be a lot. Let me try to be a bit more helpful. So far, the company has had access to £2 billion of debt finance capital to fund its modernisation. Clearly, that is nowhere near enough, so it will need an awful lot more. The chief executive, who is in the process of completing her business plan, gave an indication of what she believes the range will be. If you read the transcript, she was quite clear, although she did not say that it would definitely be a given amount—

Q 274

Tom Blenkinsop: So you still do not have a definite amount?

Mr Davey:  Let me finish. She could not give a definite amount, and she is the chief executive. She thinks that it will be in the range of £2 billion to £3 billion. People did not question her about this, but, in terms of completing the modernisation, I think she was referring to the near term. Why do I say that? I say that because a company the size of Royal Mail, in an industry going through the changes that it is going through, is not going to need just a one-off capital injection. It needs to invest continually.
In order to help these proceedings, I have asked my officials to look at the capital investment that Deutsche Post has had since it first floated shares in 2001. When you control for fluctuations in the exchange rates, it has invested £11.9 billion since 2001. Reasonable people in this room realise that, over the next nine years, the Government are not going to have £11.9 billion available, so that will have to come from somewhere else. I simply say that it is clear that, within Treasury controls and with the slowness of getting such capital, sometimes, but not always, with the need for state aid approval, that is not a great way for a large company in competitive markets to have to get capital. Our approach will not only give it more capital, but mean that capital can be more easily obtained.

Q 275

Tom Blenkinsop: That is my second point. Is there not a distinction between access to private capital and privatisation? There are examples in Canada where they could raise private capital in the Canadian postal system while remaining a public sector body. There are also domestic examples like local authority airports, Welsh Water, Network Rail. There is a distinction between access to private capital and privatisation is there not?

Mr Davey:  There is and some postal administrations that have remained in the public sector have had access to private capital. When I studied the New Zealand post office for a report I wrote for the US Congress, it had four long-term lines of credit to private banks. But it has to secure that debt against something, either assets or future revenue streams. So imagine you are a bank at the moment and Royal Mail, in the state sector, says, “Can I borrow some money?” Well, you would look at the asset sheet and notice that it has quite a lot of debt secured on its existing assets so there are not many more assets to secure debt against. So then you would say, “Right, what revenue flows have we got to secure that debt?” You would then say, “Well, you had a negative cash flow of £500 million last year so that is not looking terribly clever and a loss after tax and interest payments of £320 million.” There are not many banks that are going to lend a company money when its assets are already secured on its existing debt and it has no guarantee of revenue to pay off that debt.

Q 276

Tom Blenkinsop: That would be the same for a private owner as well.

Mr Davey:  But the point is that a private owner getting risk equity capital is putting skin in the game. They are saying, “We’re putting our necks on the line and we could lose that.” There is a big, big difference between debt capital financing and risk equity capital financing.

David Amess: I think this is the fairest way of proceeding: three Members all wish to put their points, so if they could do so then the Minister or Ministers could respond. So it is Mr Mike Weir first, Graeme Morrice second, and last, but not least, Nia Griffith.

Q 277

Michael Weir: I seek clarification on the point about the universal service obligation. The Bill talks about the financial stability of the provider of the USO and gives Ofcom the power to look at it. Can you clarify for me where the balance is between the terms of the USO and the financial stability? In other words, if Ofcom thinks that the USO provider is not financially stable with the current USO, can it reduce the terms of the USO or is this where the financial scheme comes in?

Q 278

Graeme Morrice: Minister, do you favour the sale of Royal Mail en bloc to an experienced post provider like TNT, to a private equity company or a general sale of shares? How much do you expect the sale of Royal Mail would raise? Has your Department made any estimates of this? If not, why not? Finally, would the sale price be increased if future USO and IBA commitments are weaker than they are currently?

Q 279

Nia Griffith: Could you tell us a little bit about the assessment you have made of the interest in buying a share in the post office mutual? What research and consultation have you done? Can you tell us a little bit about how you envisage that mutual working? You talk about people who have an “interest in”: how would you define that more specifically?

Mr Davey:  I have two minutes to answer those questions. I am quite happy to extend the period if we are allowed to.

David Amess: Unfortunately, we cannot.

Mr Davey:  To answer Mike’s question, if Ofcom thinks that the burden of providing the universal service is unfair, there is provision in the Bill for how it will assess it and the process for making recommendations to deal with that. I am sure we will debate those clauses at length. What we have done, which is unusual in legislation and certainly is a development from the 2009 Bill, is to provide a menu of options for what Ofcom could look at for the solution to that unfair burden.
On Graeme’s point, who do I favour buying it? We have deliberately kept our options open on that to maintain maximum flexibility. I think Richard Hooper went through the options: there could be private equity; it could be a trade sale; or it could be an IPO. In order to maintain that flexibility and get the maximum benefit for the taxpayer, I think it is right to keep our options open. I do not have an estimate of what we hope to get, because there is an awful lot to assess here, and we will try to do the best for the taxpayer, which is why we have left ourselves flexibility.
In terms of mutualisation, we have talked to a lot of people who are in that sector prior to coming forward with these proposals in the Bill. We have asked Co-operatives UK to do a consultation, and we are committing to a national, Government-led consultation once we have heard back from Co-operatives UK. We have been talking to that sector, and we have asked it, rather than the Government, to take it to the next stage, because we think it is important that we get buy-in from people who are involved in that sector.

David Amess: Sadly, the programme motion does mean that we have to finish our proceedings. If the Minister feels minded to write to any members whose questions he felt that he did not have the time to answer, that would certainly be appropriate. I thank our witnesses very much indeed for the time that you have spent with us this afternoon. The Committee is very grateful. I remind members of the Committee that we meet again next Tuesday at 10.30 am in Committee Room 9.

Ordered, That further consideration be now adjourned.— (Mr Newmark.)

Adjourned till Tuesday 16 November at half-past Ten o’clock.